Kraft Foods Spin-Off: Should You Buy Kraft Or Mondelez International

Kraft Foods (KFT) is spinning off into two companies and will trade through two stocks, namely Kraft Food Group (NASDAQ:KRFT) and Mondelez International (NASDAQ:MDLZ). We recommend high dividend-seeking investors buy KRFT, as it offers a high yield of 4.5%. Also, we recommend that growth-seeking investors buy MDLZ, as it is expected to grow in double digits, and has a high developing market exposure.

Kraft Foods Inc is one of the largest food companies in the world, with revenues of ~$54 billion. The company manufactures and sells its products worldwide. The company is spinning off its North America grocery business, which will form two separate companies; Kraft Food Group and Mondelez International. The North America grocery business falls under Kraft Food Group (KRFT), which will make Oscar Mayer lunch meat, coffee, Planters peanuts, cheese-related products and sauces, among other items. The other half of KFT will be Mondelez International, a global snacks business comprising of North American snacks and confectionery businesses, along with Kraft's Europe and developing market segments. The grocery market, which KRFT focuses on, is slow growing as compared to the snack food market that is being focused on by Mondelez International.

Kraft Food Group is expected to generate annual revenues of $19 billion. It will offer non-discretionary consumer products with stable revenues and healthy margins. It will offer a high dividend yield of 4.5%, which is on the higher side as compared to its competitors. In the long run, its earnings per share are expected to grow in the mid-to-high single digit. The company is also committed to cutting its costs.

Mondelez International is expected to generate ~$36 billion, annually. The business will have large and growing exposure to developing markets, which are expected to contribute 45% of total revenues. Developing markets provide great growth potential for the business, as the population and the middle class are expected to grow. By 2020, the world's population is expected to grow to 7.5 billion, while the middle class is expected to grow by 1.4 billion. Mondelez International is expected to experience double digit growth in its operating EPS.

Strengthening of the dollar against other currieries will be a setback for Mondelez International, as it has significant international exposure; a stronger dollar will reduce Mondelez' earnings by 15 cents per share for the year 2013. Mondelez is expected to earn $1.5 - $1.55 per share in fiscal year 2013. In the long-run, the top line for the business is expected to grow by 5%-7%. Maxwell House, the popular coffee brand, will remain with Kraft in the U.S., while its overseas sales will be with Mondelez. Mondelez is expected to focus on reaching new markets for its products, along with coming up with newer products. Mondelez International is also expected to expand its gross profit margin in the long run by increasing prices to offset the rising input cost. Currently, Mondelez's P/E is in line with its peers, however, the stock has a high growth rate and it should trade at higher multiples than its competitors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Qineqt's Staples Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.

We only use your contact details to reply to your request for more information.We do not sell the personal contact data you submit to anyone else.

Thank you for your interest in Seeking Alpha PROWe look forward to contacting you shortly for a conversation.

Thank you for your interest in Seeking Alpha PRO

Our PRO subscription service was created for fund managers, and the cost of the product is
prohibitive for most individual investors.
If you are an investment professional with over $1M AUM and received this message
in error, click here and you will be contacted shortly.

Thank you for your interest in Seeking Alpha PROWe look forward to contacting you when we have an individual investor product ready!